Net realisable value
Net realisable value (NRV) is the estimated selling price of an item in the ordinary course of business less the costs still needed to complete and sell it. It is the ceiling for inventory measurement and a basis for joint cost allocation.
See it move
A retailer paid €50 per unit but can now only sell them for €40, after €5 of selling costs still to come. Subtracting those selling costs from the selling price gives a net realisable value of €35. Because that is below the original €50 cost, the inventory must be written down to €35, recognising the loss immediately.
The formula
Variables
- estimated selling price in the ordinary course of business (€)
- estimated costs still required to bring the item to a saleable condition (€)
- estimated costs directly attributable to the sale (e.g. commissions, freight to customer) (€)
For items already in a saleable condition, costs to complete are nil, so NRV reduces to estimated selling price less selling costs. Inventory must be written down whenever NRV falls below historical cost.
Check yourself
A wine merchant holds 200 cases of a vintage that originally cost €60 per case. Following an unfavourable harvest review, the expected resale price falls to €55 per case. Typical selling costs are €3 per case. At what value should the inventory be carried on the balance sheet?